The costs of corporate debt overhang

Kristian Blickle and João A.C. Santos

Journal of Financial Intermediation, 2024, vol. 60, issue C

Abstract: We make use of rich U.S. data to show that debt overhang significantly reduces firm asset-, capex-, and employee-growth. We show these contractions are likely driven by firm decisions as opposed to the result of credit constraints or changes in investment opportunities. Our measure of overhang – liabilities to cash flow — aligns with traditional theory and focuses on the importance of a firm’s debt servicing capacity. It further allows us to capitalize on the COVID-19 shock as a quasi-natural experiment to confirm the impact of overhang on firm investment and growth.

Keywords: Debt overhang; External funding; Covid-19 (search for similar items in EconPapers)
JEL-codes: G20 G28 G30 G32 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:60:y:2024:i:c:s1042957324000469

DOI: 10.1016/j.jfi.2024.101118

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